British expatriates need to know when their UK tax residency ends and their residency in their new country commences, writes Jason Porter, business development director at Blevins Franks.
Most countries – including the UK – have a 183-day test, where if they spend this number of days or more there, they are regarded as tax resident for the whole tax year.
Some countries also have a centre of vital interest test (where the family, business, main home, etc, is there), where they can be regarded as tax resident even though they may be present for less than 183 days.
Some countries split the tax year and only regard a UK national as tax resident from the date they arrive, dividing the tax year into two. Others may not regard them as tax resident if they cannot complete 183 days in the year, which can offer up tax planning opportunities.
The UK’s own statutory residency test could mean an expatriate is restricted in the number of days they can spend in the UK before they become a tax resident, due to the number of ties or connections they have with the UK. Exceed the number of days they are allowed, and they may be regarded as a tax resident of both countries.
As a retiree, a UK national will need to establish how their pension(s) are treated in their new country.
Some will have very attractive tax regimes for pensioners, but they may need advanced planning before they move to benefit. Make sure they know where they stand before they go.
If they intend to take a 25% pension lump sum, they should do this before they leave the UK if they can, as it will be tax-free.
If they take it after they have left, it is likely to be taxable in their new country.
Capital gains timing
It is important to establish where a UK national is resident when they intend to dispose of an investment, asset, or property – particularly the latter, as they may be taxable both where they live and where the property is located – though normally they can set off one liability against the other.
They might be flexible on the date they can sell – before or after the move – timing this to the country where they will pay the least tax. Certain countries will be better for the sale of certain assets, so some homework is needed.
If they are leaving the UK, the simplest tax planning is to sell their old UK main home before they go. If that is not possible, they will need to understand what main home reliefs are available in their new country, as these may not be as favourable as the UK. If they delay the sale too long this could result in a substantial tax charge.
Many countries have a wealth tax – a tax on the value of real estate (examples are France and Portugal) – or even on most of their capital assets (Spain).
If the value exceeds the exemptions and allowances available, then they may well have some new annual taxes to pay.
It is possible to plan for wealth tax by divesting of real estate and investing in certain financial products, which are aimed at reducing this exposure.
UK inheritance tax is not based on place of residence, but on domicile. If a UK national’s parents are from the UK, and they have lived there their whole life, then they are highly likely to be UK domiciled.
This is unlikely to change if they move abroad, so their worldwide estate will continue to be liable to UK inheritance tax.
Other countries may regard them as liable to their succession or estate taxes if they live there, potentially exposing the estate to tax in both jurisdictions. This must be planned for.
They will also be subject to local succession law, which in Europe often means ‘forced heirship’, where they must pass fixed percentages of the estate to their children, sometimes ahead of their spouse. There are things they can done here, but as a minimum they should put in place a local will, as well as revising their UK will to take account of this.
Different countries have different tax regimes
Picking a country will normally come down to personal preference, but some might pick a country based on its tax regime.
Some nations might be attractive to retirees, but not for those in employment. One country might be great for income tax but has particularly high social taxes.
While the saying, ‘Don’t let the tax tail wag the dog…’ has some merit, an attractive country with a just-as-attractive tax regime will always be in high demand – with correspondingly high property prices.
UK tax-efficient investments
Financial products like ISAs and NS&I will not be tax efficient abroad.
An expatriate may want to consider cashing these in before leaving the UK, and look for what might be tax efficient locally.
Visas and residency permits
While not tax, a UK national will have to establish which visa and residency permit they will need and apply for and obtain before they go.
This process should take roughly three months but beware of consular staff shortages and administrative backlogs lengthening this timeframe.
This could affect the move date and tax planning that is time sensitive.
This article was written for International Adviser by Jason Porter, business development director at Blevins Franks.